Section 338(h)(10) Election – Both a Stock and an Asset Purchase (Part 2 of 3)

Section 338(h)(10) Election – Both a Stock and an Asset Purchase (Part 2 of 3)

This is a continuation of yesterday’s posting which gave an overview of H-10 Election Requirements. 
Exhibit 1: S Corp Target – Stock Purchase (Actual) 
P may want to purchase T’s stock for the following non tax reasons:
  • T has several assets that require title transfer that would be burdensome in an asset purchase.
  • T has contracts that are difficult to transfer.
  • T has favorable workers compensation and/or unemployment ratings that P wants to preserve.
  • T has historical preferences with governing bodies that would be lost in an asset sale.
  • T (a C Corp) has tax attributes that will survive (e.g. net operating loss carryovers).
  • T’s corporate name is retained.
Caution: As with any stock purchase comes the responsibility for disclosed and undisclosed liabiliites, along with unwanted assets.
Exhibit 2: S Corp Target – Asset Purchase (Tax Purposes) 
If the transaction is deemed to be a QSP and T is one of the three eligible corporations, the transaction can be treated for tax purposes as an asset purchase by doing the following:
  • P and T make a joint H-10 Election by filing IRS Form 8023 by the 15th day of the ninth month after the acquisition.
  • All of Old Target’s (T1’s) S Corp shareholders must agree to the election – even though up to 20% (vote and value) may not be selling their stock.
  • New Target (T2) obtains an adjusted grossed-up basis (AGUB) in the acquired assets.
  • T2’s AGUB is based upon the consideration paid for T1 stock, plus T1 liabilities that were assumed.
  • The AGUB asset allocation is reported by T1 and T2 on IRS Form 8883.
  • T1 files a final S Corp tax return as of the acquisition date and liquidates for tax purposes.
  • Now the subsidiary of P (a C Corp), T2 becomes a C Corp since an S Corp cannot be owned by a C Corp (this will be discussed in tomorrow’s posting).
Tomorrow’s posting (Part 3) will offer tips and traps regarding H-10 Election.

Darrell Arne began his professional career in public accounting in 1970. In 1983, Darrell formed his own CPA practice, with emphasis on business valuation; by 1992, he had earned the Accredited Senior Appraiser (ASA) designation in business valuation. He then earned the Certified Business Intermediary (CBI) designation in 1995, and Certified Merger & Acquisition Advisor (CM&AA) designation in 2008.

He discontinued practicing in public accounting in 1994 when he formed Arne & Co., specializing in exit strategy planning for business owners, business valuations, business acquisitions & sales, business dispute mediation, part-time CFO services, and developer of business training seminars.